Europe: Debt crisis 1, G-20 zero

The debt crisis in Europe continues to hang over the global economy after a summit of world leaders last week failed to produce any tangible new solutions.

The Group of 20 summit in Cannes, France, ended with broad promises from global heads of state to support economic growth and create jobs.

But the closed-door talks yielded scant details on the comprehensive plan the European Union agreed to on Oct. 27.

"Things are likely to get worse before they get better," said Mohamed El-Erian, chief executive of the giant bond fund Pimco, in an interview with CNNMoney's Poppy Harlow.

The Oct. 27 plan includes a series of measures to address the crisis, including debt relief for Greece, new capital requirements for banks and plans to build a financial "firewall" around vulnerable euro area economies. Read more at CNNMoney

China to the rescue?

It wasonly a matter of time before China was heralded as Europe’s escape route from its debt crisis. News that Nicolas Sarkozy, the French president, called Hu Jintao, his opposite number in China, after the crisis summit on October 27^th sparked speculation that China might put substantial amounts of money into the debt of troubled euro-zone borrowers. The chatter grew louder when Klaus Regling, the head of the European Financial Stability Facility (EFSF), the euro area’s bail-out fund, visited Beijing a day later. And a poor post-summit Italian bond auction has made the need for a deus ex machina seem even greater.

China certainly has lots of money to invest. its foreign-exchange reserves are reckoned at $3.2 trillion. It trades more with the EU than any other partner. It has exposure to the euro already. How much is not known, but currency analysts suspect that about a quarter of those reserves are already euro-denominated, giving it an incentive to keep the currency strong. It also suits China to play the part of a constructive economic actor.

Then again, we have been here many times before during the euro-zone saga. You can trace the growing seriousness of the crisis by the list of countries that have had talks with the Chinese about investments: first Greece, then Portugal, Spain and now countries at the very core of the euro zone. The pattern to date has always been the same: lots of encouraging rhetoric, perhaps even a little cash, but not enough to meet initial expectations.

There is at least something different on offer now. In the past, investment in euro-zone debt has meant taking on as much risk, and sometimes more risk, than the Europeans themselves have been willing to absorb. No one could ever explain why the Chinese would want to do that. Now China will be able to choose to invest in euro-zone debt that is ensured by the EFSF, or to buy senior tranches of the special-purpose vehicles (SPVs) that the EFSF will capitalise. China would explicitly be taking less risk than the Europeans. Read more at The Economist

In Turmoil, Greece and Italy Deepen Euro Crisis

 With political turmoil still plaguing Greece and descending upon the much larger economy of Italy, the fate of the euro and market stability worldwide hinged Tuesday on whether two of Europe’s most tangled and unresponsive political cultures could deal with their tightening fiscal gridlock.

The prospect of a new transitional, technocratic government in Greece, and signs that Silvio Berlusconi’s resilient hold on power in Italy was weakening in advance of a crucial parliamentary vote on Tuesday, did little to reassure investors that either country was prepared to grapple with the deep structural changes that investors are demanding to restore growth and reduce deficits.

In both places, it is not only the economy that is on trial, but also the ability of democratic government to make highly unpopular choices.

The crisis gripping Mr. Berlusconi’s government deepened as interest rates on the country’s debt rose on Tuesday to 6.74 percent, the highest since the introduction of the euro more than a decade ago and nearing levels that have led to bailouts elsewhere. Read more at NYTimes

Euro-Area Manufacturing Production Contracts

Europe’s manufacturing industry contracted for a third month in October, adding to signs the euro-area economy is edging toward a recession.

A manufacturing gauge based on a survey of purchasing managers in the 17-nation euro region fell to 47.1 from 48.5 in September, London-based Markit Economics said today. That’s below an initial estimate of 47.3 published on Oct. 24. A reading below 50 indicates contraction.

Europe’s economy is showing signs of a deepening slump as its worsening debt crisis erodes the confidence of consumers and executives alike. The Organization for Economic Cooperation and Development on Oct. 31 lowered its euro-region growth projections for this year and next and called on the European Central Bank to lower its benchmark interest rate at its meeting tomorrow.

“We remain of the view that the ECB will be cutting interest rates before long,” Nick Kounis, head of macro research at ABN Amro in Amsterdam, said before today’s report. “Although we think that interest rates will be left on hold this week, we expect a rate reduction in December.”

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International back scratching

BRIBERY involves two parties, not one. Lambasting officials in poor countries for their sticky fingers is easier (and less open to legal challenge) than investigating the outsiders who suborn them. On November 2nd Transparency International (TI), a Berlin-based campaigning group, published its Bribe Payers Index. Based on questions to 3,000 businessmen, this ranks 28 countries (accounting for 80% of global trade and investment) by the perceived likelihood of their companies paying bribes when doing business abroad. Construction and industries involving government contracts, unsurprisingly, were the dirtiest. This index shows a different side of bribery from TI's Corruption Perceptions Index, which focuses on corruption in the public sector. Putting them together, there is a strong correlation between corruption in the public and private sectors.

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Japan Faces $510 Billion Loss From Intervening to Curb Yen, JPMorgan Says

Valuation losses on Japan’s foreign-exchange reserves minus yen liabilities totaled 35.3 trillion yen at the end of 2010, according to Finance Ministry data. The losses may swell further as the yen is projected to climb to 72 versus the dollar by September 2012, said Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase in Tokyo.

“It’s difficult to change the trend of the currency market” with intervention, said Sasaki, who used to work in the foreign-exchange division of the Bank of Japan, at a forum in Tokyo yesterday. “Even if the action can stem the currency’s gains temporarily, the yen will eventually appreciate.”

Japan on Oct. 31 intervened in foreign-exchange markets to weaken the yen for the third time this year after the currency gained to a postwar record. Finance Minister Jun Azumi said he will continue to intervene until he’s “satisfied.”

Read more…

Greek referendum is coin-flip on euro exit

I say "while it lasts" because the opposition is mobilising a parliamentary manoeuvre to bring down the government, which may succeed - returning Europe to its status quo of containable trauma.

If Greeks reject the 50% controlled default on the debts they owe to the banking sector, then the arithmetic I revealed on Newsnight on the eve of the Euro summit comes into play - without a 50% haircut, and a further 130bn euro bailout, on top of 110bn, Greek debt spirals out of control and the country goes bust.

At this point, the value of the debt falls to maybe 10% of its face value and Greece has broken all the rules of euro membership.

The euro leaders will be faced with the option of a forced transfer of taxpayers' money to shore up the entire Greek economy with no surety, and no "local representatives" as currently planned. Or Greece leaves the euro. Read More...